Archive for June, 2008

Why do teachers think scaring teenagers is the best way to get their attention? Scare tactics are common for sex, crime, parenthood, and alcohol and drug abuse. For years, schools have tried to warn students about the dangers of drunk driving by hauling in smashed cars (or smashing them on school property), using fake blood and stage make-up to recreate the effects of accident injuries, or having a teacher dress in costume as the Grim Reaper and pull students out of class who have “died” in an auto accident. This week, El Camino High School in San Diego, California, is defending a routine that involved local cops delivering some tragic news.

A number of readers have sent emails asking if and when an electronic version of Nudge will be available for Kindle readers. It’s here. Unfortunately it’s more expensive than the hardback ($20.80 versus $17.16). That does not seem to be the norm for Kindle books. For instance, the Kindle versions of Freakonomics, Blink, and Stumbling on Happiness are all cheaper than book versions. What makes Nudge different? We’ll have to find out.

Addendum: Price drop on the Kindle version. $15.44. Less than the hardcover. That price cut was faster than the iPhone’s, although not quite as deep percentage wise.

Thaler and Sunstein did not invent the idea of nudging, which has existed at least since Eden when the Serpent nudged Adam to take a bite of the apple. Individuals, companies, and governments often nudge us for self-serving reasons. One of Thaler and Sunstein’s hopes in writing Nudge was (and is) to alert readers to nudges that surround them daily, and to be wary of the self-serving variety. Reader Matthew McClain recognizes an excellent example from the world of restaurant dining.

Many receipts in U.S. restaurants inform the customer what a tip of 15%, 20%, and 25% would be. This subtly sends a message that 20% is the middle, typical, or standard tip. Moreover, on many receipts these amounts are calculated from the post-tax bill. Tips are/were customarily calculated from the pre-tax amount. Few customers catch this, as the service is supposed to spare us the math in the first place.

In my humble opinion, these nudges are not in the spirit of libertarian paternalism. The first intentionally misrepresents the nature of the social norm. It doesn’t say, “Hey, maybe if you thought about it or were fully rational you would give a bit more.” It says (falsely), “The norm is to give more, and you’re a jerk if you don’t.” The second, at best, obscures the pre/post-tax decision from the customer. At worst, it is the kind of mathematics we’re used to dealing with from car salesmen.

Finally, I am skeptical that higher tip rates will yield higher net wages for service employees. Rather, this phenomenon is likely helping to mask inflation in restaurant prices. It will take time and experience for the public to internalize that the surcharge (over the quoted price) of eating out has increased.

When it comes to long-term relationships (no, not that kind…), reader László Sándor, from Hungary, thinks requiring choice keeps us on our toes.

When there is no choice whatsoever, the ‘default’ option the easiest to miss. I propose that anybody who wants to promote choice should rule out indefinite relationships! How many more people would look for another doctor, or even school for their kids if they received a letter each year notifying them that their current “subscription” has expired, and they need to choose again. Even for colleges, PhD adviser-candidate relationships or employee-employer relationships, there could be benefits (though which party would benefit more from the increased flexibility in the latter case is dubious and somewhat ominous). My newspaper subscription expires each year, and I do consider whether I want to keep it. If only I would be that conscious with my doctor or my insurer. Even if the ongoing relationship remains the default option, it would be a big step forward.

Worried about the economic and social costs of obesity, Japan has instituted a national law forbidding waist lines larger than 33.5 inches for men and 34.5 inches for women.

Under a national law that came into effect two months ago, companies and local governments must now measure the waistlines of Japanese people between the ages of 40 and 74 as part of their annual checkups. That represents more than 56 million waistlines, or about 44 percent of the entire population.

Violators are given nutritional guidance and “further education” if they are still overweight after six months of dieting. The law has prompted companies to adopt nudges.

With the new law, Matsushita has to measure the waistlines of not only its employees but also of their families and retirees. As part of its intensifying efforts, the company has started giving its employees “metabo check” towels that double as tape measures.

“Nobody will want to be singled out as metabo,” Kimiko Shigeno, a company nurse, said of the campaign. “It’ll have the same effect as non-smoking campaigns where smokers are now looked at disapprovingly.”

David Cameron, head of the Conservative Party in the United Kingdom, embraces Nudge in a speech today on social innovation. Cameron lays out three principles for structuring the relationship between government and citizens. All three are Nudge-friendly; the first is excerpted below. Read the full speech here.

The first principle is, in fact, an old insight and an instinctive one for Conservatives, but it has more relevance than ever in today’s new world. It’s called going with the grain of human nature. Policy-making must always take into account how people actually behave – not how an artificial system would like them to behave.

The American academic Robert Cialdini has made a huge contribution to what we know about this. In jargon: he calls it social norms. In plain English: it means recognising that one of the most important influences on people’s behaviour is what other people do. With the right prompting – or what Cass Sunstein and Richard Thaler in their latest book have called a “Nudge” – we’ll change our behaviour to fit in with what we see around us. Take energy efficiency. We’ve had endless government targets and government drives – but we could be doing something so much better. And at a time of rising fuel costs this really matters.

If you keep telling people from above “you must be more energy efficient” not much happens. If you put the typical electricity bill for a house like theirs in a neighbourhood like theirs, it transforms their behaviour.

We’ve got to get out of thinking that the only way of improving the environment is by introducing swathes of top down instruction. We’ve got to stop thinking that if government tells people what to do – they’ll do it. Instead, we’ve got to harness the power of social norms to bring about social change.

A California woman devised a commitment strategy (or maybe just a bribe) with her kids to keep them debt-free and teach them finance lessons for life. (From New York Times letters section.)

I made a deal with my kids when they went to college. I would pay all their expenses, but they could not have credit cards until they had full-time jobs after graduation. The criticism from friends was that my children would suffer for lack of a credit history. But debt history can be a lifelong problem. The best credit history one can have is a sizable savings account balance.

The New America Foundation hosted a conference this week, “The Automatic Revolution,” on financial literacy and stability. One idea floated was a product aimed at lower and middle income households to help turn tax refunds into springboards for saving. The New America’s Financial Services and Education Program is developing what it calls an Assets and Transactions Account or ATA.

Each year, tax refunds would be electronically deposited into individual ATAs for tax filers who do not direct deposit their refund into another account or who do not opt out of the ATA. The refund would be bifurcated between a transaction and a savings account, with five percent automatically deposited into an interest bearing savings account.

The ATA, which would be issued, delivered, and serviced by financial institutions on behalf of the U.S. Department of Treasury, would be accessible with a network branded card and could be used for point of sale transactions, to access cash, to make web-based or telephone bill payments and retail purchases, and possibly to make remittances and secure money orders. The savings component would help to meet short-term expenses and savings goals. And with enactment of federal legislation, the ATA could serve as the “plumbing” for large-scale asset policy targeted at lower income families.

The Manpower Demonstration Research Corporation and Rockefeller Foundation are working together on a pilot program called AutoSave that, like Save More Tomorrow, tries to create a default unrestricted non-retiremment savings account to help workers build assets.

Under this plan, employers that make payroll deductions will be required to make deposits to the AutoSave system on behalf of their employees and the self-employed would be able to make deposits into the system at their discretion. Employers will shoulder no extra costs but will facilitate automatic deposits. AutoSave will offer a limited set of low-cost investment options, such as index funds, which would be administered by professional money managers. Money deposited in this system belongs to the individuals and since deposits will be from after-tax dollars, normal tax rules apply. Individuals will have the flexibility to opt-out of the system or drawn down on their funds at any time.

Inspired by Nudge’s fifth rule of choice architecture – Expect Error – the foundation is exploring an idea it calls “just in time” education, which starts with the philosophy that people will probably make mistakes at some point and they would appreciate a little help.

One example of “just in time” financial education is the whole system of text messaging alerts so that a consumer who is in danger of, for example, overdrafting an account or going over a credit limit, knows that’s going to happen before making the “error,” thus enhancing the likelihood of avoiding the mistake.

Chase Bank offers a similar “just in time” system that sends text message alerts when certain balance levels that customers choose themselves are hit.

Disclaimer

The Nudge blog is associated with the book Nudge: Improving Decisions about Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein. Sunstein is currently the Administrator of the White House Office of Information and Regulatory Affairs and has no affiliation with the Nudge blog.